Asia bunkering industry preparing for IMO 2020 sulfur deadline

From Cosco in China to Posco in South Korea, Asian companies are pouring in millions of dollars to upgrade their shipping fleets as the International Maritime Organization’s deadline for cleaner bunker fuels inches closer.

With less than 16 months remaining, the global shipping industry is setting aside about $60 billion to obtain the right infrastructure in order to embrace cleaner shipping fuel.

The IMO’s global fuel sulfur cap is set to drop from 3.5% to 0.5% at the start of 2020, forcing shipowners to make changes. While it’s evident that measures being adopted by most point to essentially three main options—the use of new low-sulfur fuel oil, instillation of scrubbers to continue use of high-sulfur fuel oil, or changing fuel to LNG—each alternative comes with its own set of challenges.

Cosco Shipping has stepped up orders for engines that allow dual-fuel operation, and steelmaker Posco has signed an agreement to get scrubbers fitted on bulkers delivering commodities.

South Korea’s Hyundai Merchant Marine said in April it was considering using LNG bunkers or installing scrubbers in its newbuilding of 20 mega container ships.

In May, container shipper APL, a part of CMA CGM Group headquartered in Singapore, said it was considering an array of bunker fuel options—including scrubbers—to comply with the rule.

Taiwan’s Yang Ming Marine Transport Corporation in July said the use of low-sulfur fuel was the intended solution, but it couldn’t rule out other options.

More recently, Hong Kong’s Pacific Basin Shipping said it was assessing two main methods of compliance, weighing low-sulfur compliant fuel oil versus scrubbers.

Compliance to the sulfur rule is expected to be high, with some estimating it to settle at 80%-90% in the initial years after 2020 as increased public awareness and growing enforcement spur more investments to switch to cleaner fuels.

NEW BUNKER FUEL CHALLENGES
In an ideal world, the easiest and simplest way to comply with the new regulation would be switching to 0.5% sulfur fuel; however, a lack of availability for the new fuel could stand in the way. And until a standard set of specifications is agreed upon, the 0.5% sulfur bunker market is expected to be chaotic.

In August, Shell Global Marine Fuels Network said it started testing its new 0.5% very low sulfur marine fuel oil, or VLSFO, in preparation for the IMO 2020 rule. The company said it successfully completed initial trials for the blend, and tests were available at several locations, including Singapore, to shipowners and charterers purchasing fuel with Shell.

ExxonMobil said in June it is proposing a multi-billion dollar expansion at its integrated manufacturing facility in Singapore to produce higher-value products. The expansion will result in production of fuels that comply with the IMO sulfur cap, it said, without elaborating on fuel specifications.

Other refiners are taking steps in this direction, but there are questions around using blended fuels because of concerns surrounding stability and compatibility.

The use of blended fuels could cause problems like sludge formation in fuel tanks, cat fines, blocked filters or even engine failure, adding to shipowners’ woes and maintenance costs.

SCRUBBER POTENTIAL
It’s becoming more evident the adoption of scrubbers to clean engine exhaust is set to spike in response to meet the new standards as economics turn favorable, reflecting shorter payback periods as more manufacturers sprout and the cost of the technology falls.

Drewry Maritime Financial Research projects the premium of LSFO over HSFO will fall from $300/t in 2020 to $87/t by 2023, and, accordingly, the savings on bunker cost for a modern eco-VLCC will decrease from $5.7 million to $1.6 million.

For VLCCs, the cost of fitting an open-loop scrubber in a newbuild ship is around $2.5 million-$3 million, whereas the cost of retrofitting a scrubber on an existing VLCC is estimated to be about $4 million-$4.5 million.

This price trend suggests owners opting for scrubber-fitted vessels in 2020 will recover their cost in the first year alone, Drewry added.

Scrubbers have been mostly used by cruise liners and short sea ferries, not large container ships.

Operating in open-loop mode, scrubbers remove pollution from exhaust gases then flush it into the sea instead of into the atmosphere. Operating in closed-loop mode, scrubbers retain the pollution in tanks on board the ship, a practice not practical for long-distance journeys.

There is the risk regulations could change in coming years and would prohibit flushing the pollution into the sea.

Availability of HSFO for scrubber-fitted vessels, particularly at small ports, could also be restricted if the overall fleet of scrubber-fitted ships remains small, as there will be a cost associated with maintaining inventory of a less-popular fuel.

THE LNG OPTION
Hurdles also remain on the widespread adoption of LNG as a cleaner marine fuel.

Expense is a huge sticking point.

According to some industry sources, the cost of retrofitting an existing VLCC with a dual-fueled
engine would be much higher than installing one on a new build, which would potentially cost well over $15 million.

In addition, LNG engines and fuel tanks typically take up much more space than their conventional equivalents, and would likely cut down the amount of cargo a vessel can carry.

Lack of adequate crew training and concerns over the fuel’s safety have also been cited as hurdles to foster its use as the chief marine fuel.

And as shipowners are considering their options on tough, expensive decisions, refiners, bunker traders and suppliers also have to adapt to the changing industry dynamics fairly quickly.

While there might be some initial hiccups, the shipping industry is thought to be quite resilient to change.

The IMO has reiterated time and again there is no possibility of delaying the rule, and the importance of coordination among the different stakeholders becomes even more vital in such a scenario to ensure a level playing field for all.
Source: Platts